Policy
For the first time in decades, the Fed is raising rates while the US Leading Economic Indicator has fallen into contractionary territory and the global manufacturing PMI’s new orders sub-index has dropped below 50. Hence, the outlook for global stocks is currently poor. However, the underperformance of EM equities versus the US is in a late stage. We are putting EM stocks on an upgrade watch list and recommend buying EM domestic bonds opportunistically.
The pandemic gave older Americans and Brits a massive carrot and stick to retire early. The carrot being a surge in wealth, the stick being a risk to health. In other major economies, the carrots and sticks were smaller or non-existent. Hence, the shortage of older workers, and the resulting wage inflation, is a specific US and UK problem. We go through the important economic and investment implications for 2023.
Investors should maintain a conservative and defensive strategy until recession risks are clearly reduced.
This week we present our Portfolio Allocation Summary for December 2022.
Labor market strength and consumers’ evident willingness to dip into their pandemic savings keep our optimistic consumer thesis intact. We remain tactically overweight equities.
European inflation will decline through 2023, which will greatly help households and consumption. But can European inflation remain low after that?
Our best calls of the year were long defensives over cyclicals, short Russia and emerging Europe, long aerospace/defense, short Greater China, and long Latin America. Our worst call of the year was long cyber security stocks.
Commodity currencies have been rather resilient, despite the broad rise in the dollar this year. In our view, we are about to experience a big rotation in commodity currency market performance at the crosses, from NZD, to CAD and finally to AUD.
Is China completely abandoning its dynamic zero-COVID policy? When will the economy start recovering? What are the implications for Chinese stocks and China-related assets?
Have authorities provided enough financing to property developers? Will developers be able to repay these loans and, if not, who would bear the cost of potential defaults?
What should be the strategy for Chinese onshore rates and the RMB?
We are revising our 4Q22 Brent forecast to $90/bbl, expecting December front-line Brent to average $85/bbl. On the back of this early weakness, we are lowering our 2023 forecast slightly to $115/bbl, with an upside bias, anticipating a successful – if chaotic – re-opening in China beginning in 1Q23. Our expectations for copper trading above $4.00/lb in 1Q23 and above $4.50/lb in 2H23 stand.